Defusing the retirement bomb: Part I

Defusing the retirement bomb: Part I

Here goes the first post on how to defuse the retirement bomb.

From the previous articles, you would have realized that you will need 50 times your annual expense for your retirement, which would mean 6 crores today (with annual expense of 12 lakhs) or 12 crores 10 years from now (since your expenses will also double in 10 years time due to inflation)

Let us look at the equation here:

Retirement corpus (required) = 50 X Annual expense

Let us break down the problem into 3 parts-

1) Reducing the annual expense

2) Reducing the multiple required (instead of 50 times, can one make it 30 times?)

3) Generating the retirement corpus

Let us solve them one by one

1) Annual expense: A minor reduction in your annual expenditure will lead to huge reduction in the corpus required due to the multiplication factor. 20 lakh annual expense will require 10 crores retirement corpus as of today, and 10 lakh annual expense will require 5 crores corpus. A difference of 5 crores!

Remember that the annual expense includes both capital and operating expenditure. You may not be able to see the capital expenditure in your monthly bill, which may include home renovation every 15 years, car replacement every 10 years. You will need them even after retirement!

Lifestyle creep is the most important factor leading to increase in annual expenditure. A guy with 50 lakh salary and 40 lakh annual expense is as poor as someone with 10 lakh annual salary and 8 lakh annual expense (assuming equal savings as a multiple of annual expenditure). Search Google, and you will get ample resources on how to prevent lifestyle creep, and reduce your annual expenditure.

In the next part, I will cover how one can reduce the multiple (i.e. 50 times) required to generate the retirement corpus!

Happy Investing!

Source:Equityinvestor.com